Diversify your Taxes

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Published September 30, 2011

| Retirement Miracle

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While Americans look for ways to save on tax burdens, there are certain vehicles that allow for significant tax savings.

Investors often look for tax loop holes and strategies to lessen their tax burdens. By using current tax law in their favor, it is possible to avoid taxable areas, which can significantly impact a favorable outcome.

Roth IRAs
Roth IRAs are a special type of retirement plan set up under US Law. Roth IRAs are attractive to many because assets included in Roth IRAs can be passed on to the owner’s heirs.

This plan differs from other retirement plans, in that the tax break is managed on the money withdrawn from the plan during the person’s retirement, rather than providing a tax break on the money that was actually placed into the plan. Even if an owner of a Roth IRA participates in another type of qualified retirement plan, like a 401(k), contributions can also be made to the Roth IRAs. Contributions made to Roth IRAs are not tax deductible, which may be seen as a disadvantage. While withdrawals of earnings may be taxable, withdrawals of contributions are tax-free.

Municipal Bonds
Investing in the infrastructure of a municipality can benefit not only your taxes, but since municipal bonds (“munis”) are issued by the states, cities, and counties, it also funds capital projects, delivering impactful benefits on daily lives. These projects go toward the betterment of local schools, road development, and even hospital improvements. Munis are often seen as attractive for investors because they are typically issued to the investor completely tax-free from income and most state and local taxes.

While munis are a tax-free income option to preserve capital, they aren’t always risk-free, however. Market volatility is a major factor to consider when taking munis as an investment. The market is never guaranteed and there is always a possibility of the municipality that issued the bond going bankrupt.

Indexed Insurance
Indexed Insurance is another tax strategy that has been made available for the last 20 years through life insurance options. Some believe life insurance isn’t the best investing option because of the possibility of getting a better rate of return in the market, however, investments in the market can also lose money, leaving too much of a risk for negative return.

Indexed Insurance products allow participation in portions of market gains while money stays free from any market downturns and losses, which can be incredibly beneficial. While most products keep financial gains locked in at the end of each year, Indexed Universal Life Insurance uses this same engine to help consumers keep portions of money protected from market corrections.

Tax-Free Income with Indexed InsuranceWhile investors look to take complete advantage of tax-advantaged strategies, they often contribute more money to the policy than the insurance company requires. This is known as over-funding the policy. When more money goes in than is required, there is a possibility to accelerate the growth cash value, so as cash value grows, the investor is able to access the cash tax-free through withdrawals or loans from the policy.

It is important to remember with Indexed Insurance, if an investor opts to take a loan against the policy, the policy must stay in full-effect until the policyholder passes away. If not, the insured will receive a tax bill from the IRS on the amount loaned from the policy. Should the policy holder pass away before they access the cash value, the death benefit will be passed over to the beneficiaries.

There are plenty of safety levers that can be explored and put into placefor protection from the market downturns, free from any IRS dilemmas. While more and more people look to diversify those taxes, the above are just a few beneficial steps to finding alternatives to paying high taxes on your full account value.